Category Archives: G

By Weiran Zeng

Prediction in economics is the focal point of debate for the future of economics, ever since economists were burdened with the failure to “predict” the 2008 Financial Crisis. This paper discusses positions held by philosophers and economic methodologists regarding what kinds of predictions there are and creates a taxonomy of prediction. Through evaluation of those positions, this paper presents different senses of prediction that can be expected of economics, and assess economists’ reflections according to those senses.

Advisor: Kevin Hoover | JEL Codes: B41, N1, G17

Evaluating Asset Bubbles within Cryptocurrencies using the LPPL Model

By Rafal Rokosz

The advent of blockchain technology has created a new asset class named cryptocurrencies that have experienced tremendous price appreciation leading to speculation that the asset class is experiencing an asset bubble. This paper examines the novelty and functionality of cryptocurrencies and potential factors that may lead to conclude the existence of an asset bubble. To empirically evaluate whether the asset class is experiencing an asset bubble the LPPL model is used. The LPPL model was able to successfully identify two of the four crashes within the data set signifying that cryptocurrencies are within an asset bubble.

Advisors: Ed Tiryakian and Grace Kim | JEL Codes: G12, Z00, C60

Effect of Sentiment on Bitcoin Price Formation

By Brian Perry-Carrera

With the recent growth in the investment of cryptocurrencies, such as bitcoin, it has become increasingly relevant to understand what drives price formation. Given that investment in bitcoin is greatly determined by speculation, this paper seeks to find the econometric relationship between public sentiment and the price of bitcoin. After scraping over 500,000 tweets related to bitcoin, sentiment analysis was performed for each tweet and then aggregated for each day between December 1st, 2017 and December 31st, 2017. This study found that both gold futures and market volatility are negatively related to the price of bitcoin, while sentiment demonstrates a positive relationship.

Advisor: Grace Kim | JEL Codes: G12, G41, Z00

Multi-Horizon Forecast Optimality Based on Related Forecast Errors

By Christopher G. MacGibbon

This thesis develops a new Multi-Horizon Moment Conditions test for evaluating multi-horizon forecast optimality. The test is based on the variances, covariances and autocovariances of optimal forecast errors that should have a non-zero relationship for multi-horizon forecasts. A simulation study is conducted to determine the test’s size and power properties. Also, the effects of combining the Multi-Horizon Moment Conditions test and the well-known Mincer-Zarnowitz and zero autocorrelation tests into one forecast optimality test are examined. Lastly, an empirical study evaluating forecast optimality for four multi-horizon forecasts made by the Survey of Professional Forecasters is included.

Advisors: Andrew Patton, Grace Kim and Kent Kimbrough | JEL Codes: G1, G17, G00

An Analysis of Passive and Active Bond Mutual Fund Performance

By Michael J. Kiffel and Surya Prabhakar

The literature on the performance differential between passively and actively managed equity mutual funds is thorough: passively managed funds generally outperform their active counterparts except in the rare presence of highly-skilled managers. However, there exists limited academic research regarding fixed income mutual funds. This study utilizes the Fama-French bond risk factors, TERM and DEF, in a dual-step multivariate linear regression analysis to determine this performance differential between passively and actively managed bond mutual funds. The funds are comprised of either corporate or government bonds, spanning three categorizations of average maturities. Overall, it is determined that passively managed bond funds offer higher net returns than those offered by actively managed funds. Additionally, the regressions demonstrated that DEF possesses a high degree of predictive power and statistical
significance.

Advisor: Grace Kim, Edward Tower | JEL Codes: C55, G10, G11

Determinants of Franchise Value in the National Basketball Association

By Matthew Van Liedekerke

Franchise values in the National Basketball Association (NBA) have more than tripled over the last five years, with the average franchise worth $1.36 billion. Using panel data on NBA franchises between 2009 and 2016, this paper finds that market, performance, star players, and brand are significant determinants of franchise value at the team level and the NBA’s television contract is the primary driver of league-wide franchise value appreciation. The valuation methodologies used in this paper predict that a franchise in Seattle would be worth $1.4 billion in 2017, which could inform the NBA’s decision on expansion.

Advisors: Connel Fullenkamp, Alison Hagy, Kent Kimbrough | JEL Codes: Z2, Z23, G32

Macroeconomic and Capital Market Determinants of Venture Capital Investment

By Jeffrey Zeren

This thesis explores the impact of macroeconomic, equity and credit market conditions on venture capital investment. The theoretical methodology outlines the logical foundation that supports the relationships between each explanatory variable and the supply and demand of venture financing. The hypotheses suggested by theory are tested using five multi-vector ordinary least squares regression that analyze the impact of the macroeconomic and capital market variables, after adjustment for multicollinaerity and overspecification bias, on each stage of venture capital investment. The next empirical strategy uses category variables and interaction terms to vastly expand the number of observations in the dataset and provide a more robust analysis of select variables. The results show that macroeconomic conditions associated with increased economic activity and productivity growth cause an increase in venture capital investment at all development stages, though early and late stage investments are the most sensitive to growth and productivity advances. In addition, strong public equity market valuations and initial public offering successes are positively associated with venture capital investments. Finally, optimism in credit markets are found to have an indirect impact on venture capital investment, through confounding factors related to investor and entrepreneurial confidence.

Advisors: Mary Beth Fisher, Michelle Connolly, Kent Kimbrough | JEL Codes: G2, G24, E44

The Puzzle of Mobile Money Markets: An Example of Goldilocks Conditions

By Ricardo Martínez-Cid and Gonzalo Pernas

This paper investigates the supply-side and demand-side factors that explain the success of mobile money markets. Namely, we argue that there exists a set of Goldilocks conditions that best supports mobile money services. A population must have exposure to financial services to understand mobile money and have a high enough level of income to have a use for these services. However, the population must also not have access to highly developed banking architecture, such that their banking needs are already satisfied. By comparing El Salvador and Kenya, countries in different stages of development, we find empirical support for our hypothesis. Our evidence suggests that low income regions and households with some exposure to financial services are more likely to use mobile money than fully banked people who enjoy a higher income.

Advisor: Michelle Connolly, Erica Field | JEL Codes: E40, E42, G21, G23, O12, O16, O17

Vanguard’s Index Funds vs. Vanguard’s Managed Funds: a Nine Style Box and Fama-French Multi-Variable Regression Approach

By Susheel Nalla

Many investors struggle to determine whether they want to invest in managed funds or indexed funds when they build portfolio. Vanguard, founded by John Bogle, a strong advocate for indexed investing has seen his company grow to over $3.9 trillion in funds. In the last three years $1 trillion of new money has come into their passive funds as investors are moving towards saving on cheaper expense ratios. However, many people like Vanguard’s former CIO Gus Sauter believe that managed funds can deliver additional value to their investors by keeping expense ratios low and hiring the world’s best managers. This study looks at Vanguard indexed and managed funds in three different market capitalizations organized nine style boxes to see whether Vanguard’s strategy of low management expense ratios provides additional value to their own benchmarks. This study uses two comparison methods to analyze market returns of these funds from 2006-2016. First, indexed and managed Vanguard funds will be compared using a Morningstar nine-style box to directly see differences in return rates and estimate riskiness of these assets through standard deviations. Second, the Fama-French three-factor model will be used to create a regression explaining where the fund returns may be coming from. This method will determine the SMB and HML of the funds telling us the size of the equities in the fund along with their value premium over book value. Also, a market coefficient will be determined to see how close these funds are relative to a market benchmark. Overall, it is determined that Vanguard indexed funds in small-cap and mid-caps are slightly better investments based on returns and exposure to risk along with their equity composition. Based on the same criteria, large-cap funds perform slightly better than their indexed counterparts.

Advisor: Edward Tower | JEL Codes: C55, G10, G11, G12

The Investment Cost of Currency Crises in Emerging Markets: An Empirical Treatment from 1994-2015

By Eric Ramoutar

Currency crises – large and sudden depreciations in the value of a country’s currency – have been an unfortunate by-product of increased financial openness over the last half century. This study extends the already vast literature on the impact of currency crises by estimating how currency crises affect domestic investment in emerging markets. Specifically, the study uses panel data with fixed effects and various robust standard errors as well as a generalized method of moments estimator to investigate the impact of currency crises on domestic investment in a sample of 14 countries that experienced currency crises between 1994 and 2015 and 10 that did not. The results of the analysis initially indicate that, after controlling for a host of macroeconomic fundamentals, currency crises contribute significantly to dampened domestic investment. Ultimately, after controlling for banking crises, the study concludes that relatively severe, but not all, currency crises have a significant depressing effect on investment. The results further indicate that all currency crises should not be treated equally; those involving exceptionally large depreciations lead to an even greater decline in domestic investment.